How much leverage can the European Commission gain from a €21 billion loan fund for infrastructure projects? The answer to that question is the key to a new proposal by EC President Jean-Claudaine Juncker to spark total investment of about €315 billion ($393 billion) in an effort to ignite economic growth.
At its heart is a new €21 billion fund that would give the European Investment Bank the ability to loan a multiple of that amount.
The new European Fund for Strategic Investments (EFSI) would be a partnership with the European Investment Bank, receiving € 16 billion from the EU budget, combined with € 5 billion committed by the EIB.
Key to the claim of an eventual lending capability of $393 billion is a multiplier effect of 15 on the initial funding. In other words, the availability of the “seed funds” backed by the EC would encourage other private lenders to contribute up to €252 billion in private loans.
The effort will strike some as reminiscent of the search for “shovel ready” projects touted by the U.S. White House when it launched its “stimulus” program in 2009.
The problem was that the $830 billion stimulus plan simply did not find such “shovel ready” infrastructure projects able to begin actual construction immediately. The new EC plan likewise expects to generate all the new investment within three years.
The Fund will finance strategic projects across the EU in infrastructure such as broadband, energy and transport; education, research and innovation; renewable energy and energy efficiency.
To be sure, pumping that much money into an economy will have some effect. How much is the issue.
A 2014 study by the U.S. Congressional Budget Office found the “American Recovery Act” raised real (inflation-adjusted) gross domestic product by between 0.1 percent and 0.4 percent.
The ARA lowered the unemployment rate by an amount between a small fraction of a percentage point and 0.3 percentage points.
The stimulus plan increased the number of people employed by between 0.1 million and 0.5 million and increased the number of full-time-equivalent jobs by 0.1 million to 0.5 million.
add € 330 to € 410 billion to the EU's GDP and create one to 1.3 million new jobs in the coming
three years.
U.S. experience suggests those goals will not be met.
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